Microsoft wants to put the micro in micropayments

When Google launched an online-payment service called Google Checkout last year, many analysts saw it as a serious threat to eBay's PayPal, which is currently the leader in online payment, offering its services not just through eBay but through million of other sites.

Now it appears that Microsoft would like to join the online-payment party. At the recent World Economic Forum in Davos, Switzerland, Microsoft co-founder, chairman and chief visionary Bill Gates said that online "micropayments" was an area he thought the company would likely go after.

Mr. Gates said that existing online payments involving credit cards (that is, non-PayPal or Google Checkout payments) impose too high a cost on retailers and consumers, since Visa and MasterCard charge hefty clearance and settlement fees for even the smallest transaction.

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Under a Microsoft system, however, "If you want to charge somebody 10 cents or $1 a month, that will just be a click," the world's richest man said. "You won't have to manage some funny thing or pay some big credit charge where half of it goes to the clearing."

Although Mr. Gates didn't specify exactly what he had in mind, analysts say Microsoft appears to be planning a rollout of the points-based system it currently uses for the Xbox Live gaming service, in which players can buy or win points that are then exchangeable for other services and features.

Microsoft's new Zune portable music player, the software company's attempt to counter the popular Apple iPod, also comes with a music store that is powered by Microsoft Points. In order to buy songs from the Zune store, you have to buy points in blocks of $5 (U.S.), with one dollar equivalent to 80 points.

There have also been reports that the software giant intends to reward consumers who share songs using the Zune's built-in wireless networking, and that these rewards will come in the form of Microsoft Points.

Could the Microsoft system become a micropayment scheme to rival PayPal or Google Checkout? Perhaps. But it's worth noting that Microsoft has been trying for some time to get its hooks into the payment side of the Internet, without a whole lot of success.

Microsoft Passport was the first attempt, which began as a single ID system for websites and services. The software company then tried to graft onto the system an authentication and payment service involving bank credit cards and other payment methods, but that idea got little support from banks or retailers.

Passport was supposed to become part of a larger ID and payment network that would run on the company's .Net service, which was intended as an underlying framework for websites and services. But retailers were cautious at best about the new Microsoft vision, and the attempt to control online payment methods also looked bad at a time when the company was being sued for antitrust violations by the U.S. government.

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Will Microsoft's current system be more successful? There is no question that the company has a captive market of enthusiastic gamers who might be willing to use Microsoft Points as currency within the Xbox Live Marketplace. Some of those may even become Zune owners, and then be able to transfer points between their music player account and their game account.

But will enough retailers, payment-handling services and credit card issuers be willing to jump on the Microsoft Points bandwagon and make it a truly Internet-wide micropayment system? Microsoft's past track record with Passport, the MSN Wallet, .Net and Hailstorm indicates success is far from a sure thing.

Critics also say the Microsoft system is too confusing for most consumers, and that it makes it too easy for users to spend a lot more than they realize (in the same way that many slot machines use tokens, in the hope that patrons will spend more).

Microsoft, however, argues that a points system makes it easier for people from different countries to use the service, since they can do so without having to account for the exchange rate of their local currency.

Even if Microsoft wasn't starting with a somewhat mixed track record, PayPal's dominance in the payment market is not easily derailed, as even the mighty Google has discovered.

Google Checkout has gotten some adoption by retailers, but so far the company's market share is relatively minimal, despite recently launching a promotion in which users were offered a $10 discount coupon if they used Google's payment service.

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That said, both Google and Microsoft have formidable resources at their command, and eBay is likely to be more than a little uncomfortable with the world's largest software company and the world's top search engine breathing down its neck. Online payments looks to be turning into a horse race.

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